With the global economy on the mend, countries in the Middle East and North Africa are witnessing a pickup in trade and economic growth. Aided by rising oil prices and production levels and supportive fiscal policies, economic growth for the region as a whole is projected to exceed 4 percent in 2010, almost double what it was in 2009.

In contrast, and unlike many emerging markets elsewhere, the region’s oil-importing countries saw only a mild slowdown in economic growth last year to 4½ percent and are likely to see growth nudge up to around 5 percent this year. However, as our October 2010 Regional Economic Outlook for the Middle East points out, that growth rate is well below the average of 6½ percent a year required to create the 18 million jobs needed over the next decade to absorb new labor-market entrants and eliminate chronically high unemployment.

The missing ingredient

A key factor in this predicament is that the region’s oil-importing countries in particular still lag behind other countries on most indicators of ‘competitiveness.’ This implies that they are missing out on opportunities to boost economic growth and employment.

Of course, ‘competitiveness’ is one of those nebulous terms that economists love to use. And, as Robert Z. Lawrence—Professor of Trade and Investment at Harvard’s Kennedy School of Government—has suggested:

‘Competitiveness,’ particularly with reference to an entire economy, is hard to define. Indeed, competitiveness, like love or democracy, actually has several meanings.

For us, competitiveness means mainly that a country can successfully export its goods to other countries and that domestic industries can hold their own when it comes to imports. What are the ingredients for being competitive: high productivity, business environments that help firms rather than put obstacles in their ways, and workers that are skilled and experienced.

Policy actions to raising competitiveness

So, if these countries are to achieve higher growth rates, they must rapidly enhance their competitiveness. First, I should acknowledge that they have made substantial progress toward this. But, international rankings—the World Economic Forum’s Global Competitiveness Report is one example—point to specific areas in need of further improvements.

On the trade front, over the past two decades, most of these countries have reduced the number and level of tariffs levied on imports. Egypt and Syria, in particular, have accelerated progress in this area in recent years. Such moves, in many countries, have been accompanied by the privatization of formerly government-run key industries. Together with easier access to foreign capital and technology, this has boosted export growth and helped improve economic outcomes of the past decade. Nevertheless, tariffs in these countries remain high (still averaging double digits), and these and other impediments to trade still need to be tackled.

Much also remains to be done to make labor markets more efficient.

In many countries, a dominant public sector attracts many of the most qualified graduates and also serves as a ‘safety net’ for those who cannot find jobs elsewhere, and often at wages well above those for comparable private sector jobs. Government pay scales should differentiate across skills within a framework of overall wage and hiring restraint.

And education systems need to focus more on ensuring that new workers have the skills and knowledge that the private sector needs.

These reforms should go hand-in-hand with efforts to reduce—or even eliminate—regulatory ‘red tape’ and strengthen institutions, thereby providing a more job-friendly environment for the private sector.

But helping an economy become more competitive means going beyond remedying these types of ‘internal’ inefficiencies. It requires countries in the region to set up sophisticated transport, communications, and financial services that will allow them to integrate into the global supply chain and, thereby, tap into new export markets. And, here, there are some excellent examples within the region of what works.

Tunisia, for one, stands out as having become an ‘outsourcing hub.’ It has successfully attracted foreign direct investment in textile production, car assembly, and food processing over the past several years and, more recently, in information technology and aeronautics. Simplified regulation, modern infrastructure, government incentives, and commitment to a knowledge-based economy that generates well-trained, low-cost workers, are key factors in this success.

Dubai—notwithstanding the fallout from its reliance on large-scale, highly-leveraged property development—has transformed itself into a dominant regional hub for international trade and services by setting up a cutting-edge logistics industry, with remarkable success in multiplying the emirate’s GDP.

Other countries in the Gulf Cooperation Council have also made great strides in improving competitiveness by enhancing institutions and upgrading their infrastructure. The challenge now is to build on this to further upgrade their innovative capacity and education outcomes to help diversity their economies away from the hydrocarbon sector.

For the countries in the region, greater competitiveness will be the crucial ingredient in the recipe for continued, and even greater, economic success.

Originally published at iMFdirect and reproduced here with the author’s permission.